Friday, January 5, 2018

Risk Appetite Refreshed in the New Year

The New Year started with a bang as stocks climbed aggressively and NYSE floor
traders donned their ‘Dow 25,000’ hats. President Trump was quick to note the
DJIA milestone, providing some distraction from a bad week of PR for the
administration after his casual mention of the nuclear option in a tweet aimed
at North Korea, and the release of a tell-all book about the White House that
painted the President in a bad light and appeared to drive a wedge between him
and former chief strategist Steve Bannon.

A slightly subpar US December payrolls report did not deter the risk appetite
in the markets, and European bourses largely outperformed on the back of more
solid data including record low unemployment claims in Germany. The oil market
remained bullish as the US Interior Department announced plans to open up more
offshore areas to drilling. WTI crude rose to its highest level since June
2016, hitting the $62 handle, while natural gas prices paired last week’s gains
as the end is in sight for the arctic freeze gripping half of the US. The bond
yield curve continued to flatten, with the 2-10 year spread narrowing to under
50 basis points on Friday. That garnered a prediction from Janus’ Bill Gross
that the bond market is headed for a mild bear market. The dollar index
continued in last year’s trend, drifting another 0.2% lower. For the week, the
S&P500 gained 2.6%, the DJIA added 2.3% and the Nasdaq rose 3.4%.

In corporate news this week, Macy’s and JC Penney reported improved sales y/y
for the holiday season, and Costco also delivered strong results, handily
topping Wall Street SSS estimates. Intel shares dropped after reports broke
that its chips are susceptible to a hardware-based exploit and that the
security patch could significantly impair performance. In M&A news,
Dominion Energy agreed Tuesday to acquire Scana Corp in a deal valued at
$14.6B, including debt. Brookfield Business Partners announced it would buy
Toshiba’s bankrupt nuclear services company Westinghouse Electric for $4.6B,
including assuming the Pittsburgh-based company’s underfunded pension plan.
MoneyGram and Ant Financial had to terminate their amended merger agreement
thanks to an inability to receive CFIUS approval.